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A state-level analysis of Okun's law

Amy Guisinger (), Ruben Hernandez-Murillo (), Michael Owyang () and Tara Sinclair

Regional Science and Urban Economics, 2018, vol. 68, issue C, 239-248

Abstract: Okun's law is an empirical relationship that measures the correlation between the deviation of the unemployment rate from its natural rate and the deviation of output growth from its potential. This relationship is often referred to by policy makers and used by forecasters. In this paper, we estimate Okun's coefficients separately for each U.S. state using an unobserved components framework and find variation of the coefficients across states. We exploit this heterogeneity of Okun's coefficients to directly examine the potential factors that shape Okun's law, and find that indicators of more flexible labor markets (higher levels of education achievement in the population, lower rate of unionization, and a higher share of non-manufacturing employment) are important determinants of the differences in Okun's coefficient across states.

Keywords: Correlated unobserved components; Potential output; Natural rate of unemployment (search for similar items in EconPapers)
JEL-codes: C32 E32 R11 (search for similar items in EconPapers)
Date: 2018
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Related works:
Working Paper: A State-Level Analysis of Okun's Law (2017) Downloads
Working Paper: A State-Level Analysis of Okun’s Law (2015) Downloads
Working Paper: A State-Level Analysis of Okun's Law (2015) Downloads
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